The four most expensive words in the English language are "this time it’s different." Sir John Templeton
All hail emperor Jeff, the richest man in the land!!! After Amazon.com reported blockbuster earnings on Thursday afternoon (.52 cents per share), Friday brought a 13% jump in the all important metric of the Amazon stock price, and low and behold, Mr. Bezos overtook fellow Seattle resident Bill Gates (along with plenty of other titans of industry) to claim the throne. Fellow technology behemoths like Google, Microsoft, and Intel also blew past earnings estimates and investors swooned, sending the NASDAQ composite up 2.20% on Friday. Earlier in the week, we found out that the first reading on 3rd quarter GDP came in at 3%, giving more proof that the domestic and global economies are firming. With potential tax cuts on the doorstep and the traditionally strongest two months of the year for markets in front of us, clearly plenty of people believe things look very promising.
At the very least, from an investment standpoint, one has to be impressed with the results the tech titans posted, especially because of the growth in revenues in each of those companies. All showed strength in a variety of areas, specifically from cloud, data centers, advertising, and consumer demand in recurring areas like software and service subscriptions. However, the reaction by some investors is troubling to a grey haired veteran like myself. When you hear comments like, ‘Look, its easy, you just have to own big tech,” or ‘Yes, really, this time it is different,’ I get queasy in the stomach. Historically, the last few months of the year are period where winners win and losers lose, meaning, if you are one of the chosen few, your stock keeps advancing through the end of the year. If not, well, it is forgotten. In a market where this has been the case all year, earnings metrics for some of these entities, like, ahem, Amazon and the FANG crew, were stretched before these results (except for Apple). Trading at a measly multiple of 145X forward estimates and 280X trailing, yes Amazon put up 24% revenue growth and for a company with over 100 billion of sales the growth is literally unprecedented, but so is the stock price. As an investor, I am trying to get the most I can for my money, not the least. Still, you have to hand it to Jeff and the Amazon crew as they have a great company. However, the enthusiasm for their stock, and the lack of it in other areas, may very well be offering up mouth watering opportunities in other places. I am counting on it, but we shall see.
In the oil patch, Exxon and Chevron posted much improved results in both upstream and downstream segments, due to stronger prices for black gold. Brazil auctioned off some large blocks and Exxon, Shell, and BP all got prime field locations. Next week, the European big boys will probably report improved results as well, so keep that in mind as investors feel much better about the energy area. Venezuela made good on the principal payment of a large debt tranche, but stiffed creditors on the interest. They have another payment due this week, but at some point, given the choice of paying foreign lenders or getting badly needed supplies for their people, Mr. Mudero may choose to stiff the banks and default. Note the key word there, may (must?).
In other areas of the market, big cable took it on the chin as the belief that cord cutting will accelerate continues to plague the sector. Expedia posted numbers that investors hated, and the stock sold off. In the travel area, still, the dominant players remain the on line travel agents, Priceline and Expedia, and that probably won’t change any time soon. In the joy that remains retail, J.C. Penny’s hurt the whole group on Friday with a poor number and reduced guidance for the rest of the year. It may be blasphemy, but now is the time to become quite familiar with the entire retail space as they have been destroyed, and if you are selective you may find treasure where others see trash. Let me remind readers of a few years ago when Best Buy and Hewlett Packard were being given away, and have subsequently seen their fortunes (and you know what) dramatically improve. Perhaps something similar can occur over the next few years in a different situation?
On the regulatory front, the FCC decided to delay it’s November ruling on Net Neutrality, and also loosened long time restrictions on ownership of local markets for multiple media assets. The Senate blocked the CFPB from allowing class action lawsuits versus banks with respect to credit card claims. Democrats attacked the decision as a giveaway to Wall Street while Republicans applauded the idea that community banks and credit unions would be more willing to lend to businesses and consumers without large trial lawyer suits hanging over their heads. President Trump appears to be on the path to deciding who he will select to head the Federal Reserve for the next term. The leader is rumored to be Jerome Powell, an existing Federal Reserve Board member, with Stanford Economist John Taylor thought to be given the vice chairmanship. Mrs. Yellen appears to be given little chance to retain the position as the always humble and cooperative Mr. Trump favors his own choices to make their mark on the highest positions in the global financial system. Next week brings the heart of the earnings season as Apple, Facebook, and a slew of other global companies step up to the plate to tell us how they did. Stay tuned.
Finally, I am not sure if you have been reading about the personal stories in the fires up in Napa Valley and how so many people had elderly loved ones who had difficult escaping that situation. Very sad. On the lighter side, Tuesday brings Halloween and I hope it is a joyous occasion for you and yours. I know my daughter is very excited about it. Do you think it has anything to do with the candy aspect? No, I didn’t think so either. Anyway, thanks for reading the blog, and if you have any comments, thoughts, or questions about the it or investing, please email me at [email protected]. One reminder, on Thursay we will post our second podcast of Chasing the Elephant- A Discussion of Potential Investments. The guest will talk about Mr. Softee, formerly known as Microsoft.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst
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